Investors call for greater clarity on value of ESG

Date: 01 Nov 2023

Ashleigh John

A recent survey of chief investment officers by McKinsey shows that, whilst major investors believe that ESG is important, they need greater clarity about the ESG value proposition, as sustainability aspirations or metrics on a page without context are not sufficient to link initiatives to cash flow.

Approximately 85% of the chief investment officers surveyed stated that ESG is an important factor in their investment decisions, with 60% reviewing their overall portfolio for ESG considerations and around 80% assessing individual company positions in the context of how ESG affects forecasted cash flows. A significant majority of respondents said that they are prepared to pay a premium for companies that show a clear link between their ESG efforts and financial performance.

However, communication and clarity are a significant barrier. Investors say that companies’ current ESG communications are falling short in significant ways and call for clearer methods to measure long-term value, greater certainty on regulations, and practicable ESG-related frameworks.

The surveyed investors also demonstrated an eagerness for clearer ESG standards, noting that ESG scores today, unlike financial ratings, don’t correlate fully amongst ESG score providers. ESG ratings can correlate at less than 60%, due to the different elements and weighting each agency assigns to various ESG metrics, compared to 99% of financial ratings.

McKinsey says that investors do recognise that ESG can be an important factor in choosing whether to invest in specific companies, and that it may be time for executives to step up and fully integrate ESG into their equity story, making sure to connect ESG to value creation, in order to differentiate themselves from their peers based on ESG value impact.

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